The following items must be in construction contracts:
- Commencement date of the work.
- Completion date of the work.
- The scope of the work/plans and specifications. An explicit and detailed scope of work or carefully drawn set of plans and specifications tells the contractor what he is required to build, and what the association will receive for its money. A less specific description of the project, its elements, and its systems increases the chance that the association will be dissatisfied with the work and will want to change its scope.
- Progress payments. Contracts usually provide for progress payments during the course of the work. If the association does not monitor progress payments carefully, payments to the contractor may exceed the value of the work completed up to the date of the payment. It is possible for a contractor to receive payments that so exceed his expenses that he realizes the cost of completing the job exceeds the unpaid amount of the contract price. In such instances, a contractor may walk off the job because he will only lose money if he continues.
- Final payment. To make sure the contractor has plenty of incentive to finish the job, the construction contract should provide that the Association retain a portion of the payments due to its Contractor on each progress payment.
It is customary that an owner pays 90% of the Contractor’s invoice approved by the administrator. Upon final payment, it is critical that the association obtain an unconditional final lien release.
- Specific duties of the contractor. Many contracts do not specifically describe the scope of services to be provided by a contractor, structural engineer, design professional or consultant.
- Insurance. All contractors, structural engineers, design professionals and consultants must maintain certain minimum liability insurance coverage for claims for damages to persons or property that may arise out of the work under any contract whether directly or indirectly caused by the contractor, structural engineer, design professional or consultant or their employees or subcontractors. Also, such insurance coverage should include claims under California Worker’s Compensation law and other employee benefit laws and should name the association and property manager as additional insureds.
- Performance bonds. Some associations conclude that they are better off by obtaining a bond from a third party in case the contractor does not have the financial resources to complete the construction work.
- Correcting work. In the event the contractor, design professional, structural engineer, or consultant fails to perform their work properly under the terms of any agreement, the agreement should provide that the contractor, design professional, structural engineer, or consultant redo their work at no cost to the association.
- Warranties. Reputable contractors provide the association with certain warranties regarding the work and material used under the contract.
- Termination of the contract. All contracts should provide specific performance guidelines that, if not met, and after prior notice, will allow the association to terminate the contract.
- Changes in the work. It is possible that the scope of work necessary to complete complex construction projects will be altered after the construction process begins. This often occurs because a contractor, design professional or consultant discovers additional damage or reevaluates the best method for repairing the damage which can only be determined after the parties have entered into the original contract. A well-drafted contract should address how changes in the work are evaluated, who is authorized on behalf of the association to approve changes and a mechanism developed for possible changes in price that result from such changes.
- Notice provisions. We recommend that a specific provision describing how notices are to be given be included in the contract so that in the event a dispute arises under the contract, and one party desires to terminate the contract, or changes in the work occur, proper and timely notice is given to the parties.
- Status of the contractor as an independent party. We recommend that such a provision be clearly stated in the contract.
- Dispute resolution. Many associations find it beneficial to include a provision which specifically discusses how any disputes will be resolved. This provision may include a binding arbitration provision or other alternative dispute resolution and establishes the framework for such forums.
- Payment of attorney’s fees. Contracts typically include a provision which states that in the event of a dispute between the parties, the prevailing party is entitled to recover all of its reasonable attorney’s fees and costs in connection with resolving such dispute.
- Indemnification. We strongly recommend that contracts contain a provision in which the contractor, design professional, structural engineer, or consultant indemnifies and holds the association harmless from all claims and liabilities incurred in connection with the work to be performed under the contract.
The quality of the contractor, design professional, structural engineer, and the consultant is probably more important to the association than the provisions of the construction contract. It will be of little value to try to enforce a contract against a “deadbeat” contractor, design professional, structural engineer, or consultant. We strongly recommend that you obtain good references for your proposed contractor, design professional, structural engineer, and consultant. Their personal integrity is probably the most important component. However, you may also want to determine their financial condition. Some owners request financial statements from their contractors, design professionals, structural engineer, or consultants before executing an agreement.
While most association’s governing documents require the association to obtain at least two bids from reputable licensed contractors, we strongly recommend that all associations obtain multiple bids prior to entering into any contract. Obtaining multiple bids may be the only method that an association has to confirm that the prices quoted by the different contractors, design professionals, structural engineers, and consultants are fair and reasonable and that the scope of the services accurately describes the necessary repair work.
As noted above, there are many issues which should be addressed in a contract between an association and a contractor, design professional or consultant. We are mindful of the fact that the amount of money and the scope of services in such contracts can range from several thousand dollars to multi-million dollar repair contracts. Although all contracts generally raise the same issues as set forth above, the contracts involving significant sums of money or addressing critical initial evaluations of the extent of the damage may require more careful review than smaller contracts involving minor repairs. We strongly recommend that all associations consider evaluating the foregoing issues raised in this letter for each contract submitted by any contractor, design professional, structural engineer, or consultant.
A contract which is properly drafted before work commences will ultimately save the homeowner association significant money and will help address certain problems and issues which may arise during the construction.